Executive summary of Shareholder Value Analysis & Financial Management

Shareholder value analysis is a financial management approach established in the 1980s. The aim of this approach is to create value for the shareholders. The value for the shareholders is evaluated through the funds which flow in the organization and with the prices of shares that keep on changing with the passage of time. For understanding the value creation in the organization it is important to identify and understand the areas where the value is being created. It means that value drivers of the organization need to be identified in order to create value for shareholders. The net profit of the organization indicates how much profit the corporation is generating. The organization can evaluate profitability ratios to get deep insights regarding the profitability of the organization higher profitability means high value for shareholders and lower profitability will definitely decrease the shareholder value. Operational efficiency is required in the organization so that the organization can increase its revenue, performance and overall profitability condition. If the operational efficiency is high then it means that it will enhance the value of the organization which will ultimately increase the shareholder value as well. The operational efficiency has a significant impact on the cash flows from operations which ultimately affect the shareholder value maximization. It is always recommended by the financial analysts to keep the optimum capital structure in the organization. The optimum capital structure not only reduces the cost of capital but also helps the organization to manage its loans more efficiently. The main aim of every organization is to create profit and for creating profit it is highly necessary that the corporation must generate a significant amount of revenue. The organizations which generate a significant amount of revenue experience growth in their business size and profitability. The organizations that do not experience growth in revenue experience decline in profit and also the shareholder value reduces.

Table of contents

Introduction. 4

Shareholder Value Analysis & Financial Management 4

Main financial value drivers. 5

Improvement in profit margins. 5

Operational efficiency. 6

Capital structure decisions. 7

Growth in Revenue. 8

Conclusion. 8

Recommendation. 9

References. 10

Appendix. 11

 Introduction of Shareholder Value Analysis & Financial Management

The aim of this paper is to provide deep insights regarding shareholder value analysis and financial management. The paper summarizes how the organizations adopted the SVA approach and why they consider this approach important for financial management. The shareholder wealth maximization not only improves the value of the organization but also allows the organizations to meet the interests of its stakeholders. The stakeholders of the organization are responsible for financing the assets of the organization. Therefore it is the duty of the corporation to focus on the interest of the shareholders and their profit maximization.  

Operational efficiency is required in the organization so that the organization can increase its revenue, performance and overall profitability condition. If the operational efficiency is high then it means that it will enhance the value of the organization which will ultimately increase the shareholder value as well. At the beginning of the paper, a brief introduction to the SVA has provided. In the second part of the paper key financial value drivers are discussed which creates value in the organization and ultimately enhances the shareholder value. In the third part of the paper, a brief conclusion is provided which summarizes the whole paper. At the end of the paper, the recommendation is provided for increasing the shareholder’s wealth.

Shareholder Value Analysis & Financial Management

Shareholder value analysis is a financial management approach established in the 1980s. The aim of this approach is to create value for the shareholders. The value for the shareholders is evaluated through the funds which flow in the organization and with the prices of shares that keep on changing with the passage of time. The SVA approach allows the organization to take such financial decisions through which the shareholder value can be enhanced. The financial managers linked their strategy with the strategy of its stakeholders so that their interests can also be fulfilled accordingly.

Main financial value drivers of Shareholder Value Analysis & Financial Management

For understanding the value creation in the organization it is important to identify and understand the areas where the value is being created. It means that value drivers of the organization need to be identified in order to create value for shareholders. If the top management of the organization does not know what are the key value drivers of the organization than the management cannot create value for the shareholders efficiently. It is important to understand how the value drivers affect the cash flows of the corporation so that the management of any organization can take the rational decision regarding the shareholder value maximization (Spender, 2014).

Improvement in profit margins of Shareholder Value Analysis & Financial Management

The net profit of the organization indicates how much profit the corporation is generating. The organization can evaluate profitability ratios to get deep insights regarding the profitability of the organization higher profitability means high value for shareholders and lower profitability will definitely decrease the shareholder value. That is why the management should focus on the profitability ratios to get deep insights regarding the performance of the organization. In the above table, the profitability ratios of apple organization are mentioned as an example to understand how profitability ratios provide a quick overview regarding the shareholder value and financial management of the organization (Chandra, 2011).

Profitability has a significant connection with shareholder wealth maximization. Usually, investors invest in such organizations where the investors can get a significant amount of return on their investment. For this, the investors first evaluate the profitability and financial performance of the corporation. The investors evaluate the profitability ratios and analyze the financial statements of the organization to make a decision regarding their investment. Investors know that the companies that earn high income provide dividends on the shares. Such companies whose profitability is not good unable to provide a dividend to the shares because they do not have enough resources from which they can meet their shareholder’s interests (Chandra, 2011).

Operational efficiency of Shareholder Value Analysis & Financial Management

Operational efficiency is required in the organization so that the organization can increase its revenue, performance and overall profitability condition. If the operational efficiency is high then it means that it will enhance the value of the organization which will ultimately increase the shareholder value as well. The operational efficiency has a significant impact on the cash flows from operations which ultimately affect the shareholder value maximization. In order to get deep insights into the efficiency and asset management decisions, the organization can evaluate efficiency ratios such as inventory turnover, asset turnover, and total assets turnover to know how efficiently the organization is utilizing its assets for generating revenue. The below table provides efficiency ratios of Apple Corporation as an example to understand how the efficiency of the organization can be understood (Mohana, 2011).

The operations of the corporation are directly linked with the overall financial performance of the organization. The operations include a lot of activities that allow the organization to generate income. Sometimes the corporations unable to manage their operations efficiently which can increase the costs of the corporation. When the costs of the corporation increase it means that the company will unable to generate huge profit. That is why it is important that the corporation should utilize its resources efficiently to generate higher revenue. The higher revenue will definitely help the organization to generate higher profitability. The costs of those corporations remain low who manage their resources efficiently (Mohana, 2011).

Capital structure decisions of Shareholder Value Analysis & Financial Management

It is always recommended by the financial analysts to keep the optimum capital structure in the organization. The optimum capital structure not only reduces the cost of capital but also helps the organization to manage its loans more efficiently.  If the cost of capital is going to be higher than the profitability of the organization will decline which will reduce shareholder value. It is important that the organization should finance its assets from both debt & equity so that optimum capital structure can be created (Fridson & Alvarez, 2011).

The capital structure of the organization should be optimum because if the organization's capital structure is not optimum than the organization can suffer from different types of serious issues which might lead to insolvency conditions. Sometimes the organization takes too much debt from the financial institutions and does not think about its repayment. Repayment of too much debt becomes difficult for the corporation and ultimately the company will have to wind up its operations because it is not in the position to pay its loans. That is why it is always suggested to finance the assets of the company is such a way that it won’t affect the operations of the company (Fridson & Alvarez, 2011).

Growth in Revenue of Shareholder Value Analysis & Financial Management

The main aim of every organization is to create profit and for creating profit it is highly necessary that the corporation must generate a significant amount of revenue. The organizations which generate a significant amount of revenue experience growth in their business size and profitability. The organizations that do not experience growth in revenue experience decline in profit and also the shareholder value reduces. In order to enhance the shareholder value, it is highly necessary that the organization experience growth in sales because it is a key driver of value creation. The below table indicates how much revenue growth an organization has experienced in a specific time period (Pandey, 2015).

The revenue of the organization is the main source from which the companies increase their profitability. The organization should adopt different techniques that help organizations to increase their revenue. It is evident that when the revenue of the organization is going to increase the profit of the company will also increase. This means that the overall value of the corporation will experience growth. Therefore focusing on the revenue growth is necessary because it will tell how efficiently the corporation is managing its operations and whether shareholder wealth is increasing or experiencing a decline (Pandey, 2015).

Conclusion of Shareholder Value Analysis & Financial Management

It is concluded that for understanding the value creation in the organization it is important to identify and understand the areas where the value is being created. It means that value drivers of the organization need to be identified in order to create value for shareholders. If the top management of the organization does not know what are the key value drivers of the organization than the management cannot create value for the shareholders efficiently. It is always recommended by the financial analysts to keep the optimum capital structure in the organization.

The capital structure of the organization should be optimum because if the organization's capital structure is not optimum than the organization can suffer from different types of serious issues which might lead to insolvency conditions. Sometimes the organization takes too much debt from the financial institutions and does not think about its repayment. The operations of the corporation are directly linked with the overall financial performance of the organization. The operations include a lot of activities that allow the organization to generate income. Sometimes the corporations unable to manage their operations efficiently which can increase the costs of the corporation. When the costs of the corporation increase it means that the company will unable to generate huge profit.

Recommendation of Shareholder Value Analysis & Financial Management

It is recommended to the organizations by the financial analysts to keep the optimum capital structure in the organization. The optimum capital structure not only reduces the cost of capital but also helps the organization to manage its loans more efficiently.  In order to enhance the shareholder value, it is highly necessary that the organization experience growth in sales because it is a key driver of value creation. It is recommended to the organizations that they should evaluate financial ratios and compare them with the ratios of other corporations to get deep insights regarding their financial performance.

 References of Shareholder Value Analysis & Financial Management

Chandra, P., 2011. Financial Management. s.l.:Tata McGraw-Hill Education.

Fridson, M. S. & Alvarez, F., 2011. Financial Statement Analysis: A Practitioner's Guide. s.l.:John Wiley & Sons.

Mohana, R. P., 2011. Financial Statement Analysis and Reporting. s.l.:PHI Learning Pvt. Ltd.

Pandey, I., 2015. Financial Management. s.l.:Vikas Publishing House.

Spender, J.-C., 2014. Business Strategy: Managing Uncertainty, Opportunity, and Enterprise. s.l.:OUP Oxford.

Appendix

Source: https://financials.morningstar.com/ratios/r.html?t=AAPL